Dow Chemical has sold SFr 25 million in chemicals to Ciba-Geigy. Payment is due in 180 days.
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Spot rate:
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$0.7957/SFr
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180-day forward rate
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$0.8095/SFr
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180-day U.S. dollar interest rate (annualized)
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5.25%
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180-day Swiss franc interest rate (annualized)
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1.90%
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180-day call option at $0.80/SFr
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2% premium
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180-day put option at $0.80/SFr
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1% premium
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a. What is the hedged value of Dow's receivable using the forward market hedge? the money market hedge?
b. What alternatives are available to Dow to use currency options to hedge its receivable? Which option hedging strategy would you recommend?
c. Which of the hedging alternatives analyzed in parts (a) and (b) would you recommend to Dow? Why?